Quarterly Financial Report for the Quarter Ended September 30, 2015
This quarterly report has been prepared by management as required by section 65.1 of the Financial Administration Act (FAA) and in the form and manner prescribed by the Treasury Board (TB). This report should be read in conjunction with the Main Estimates and Supplementary Estimates A. This report has not been subject to an external audit or review.
The Defence mission is to defend Canada and Canadian interests and values, while contributing to international peace and security. On behalf of the people of Canada, the Canadian Armed Forces (CAF) and the Department of National Defence (DND) stand ready to perform three key roles:
- Defend Canada - by delivering excellence at home;
- Defend North America - by being a strong and reliable partner with the United States in the defence of the continent; and
- Contribute to International Peace and Security - by projecting leadership abroad.
The Defence mission is delivered through six program activities. A summary description of these program activities can be found in Section II - Report on Plans and Priorities.
Basis of Presentation
This quarterly report has been prepared by management using an expenditure basis of accounting. The accompanying Statement of Authorities includes the Department's spending authorities granted by Parliament and those used by the Department consistent with the Main Estimates for fiscal year (FY) 2015-2016. This quarterly report has been prepared using a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities.
The authority of Parliament is required before moneys can be spent by the Government. Approvals are given in the form of annually approved limits through appropriation acts or through legislation in the form of statutory spending authority for specific purposes.
The Department uses the full accrual method of accounting to prepare and present its annual departmental financial statements that are part of the departmental performance reporting process. However, the spending authorities voted by Parliament remain on an expenditure basis.
2. Highlights of fiscal quarter and fiscal year-to-date (YTD) results
In the following section on financial highlights the Department is providing explanations for differences, for the fiscal quarter and fiscal YTD, at September 30, 2015 as compared to the same period last year, exceeding a materiality threshold of $20.0M or for those items with an unusual percentage increase/decrease.
Statement of Authorities
Total budgetary authorities available for use increased in 2015-2016 from those of 2014-2015 by $586.3M (3.1%). This net increase is the result of increases in Vote 1 spending authority of $1,271.9M, decreases in Vote 5 spending authority of $713.9M, decreases in Vote 10 spending authority of $9.4M, and an increase in spending authority for Statutory Payments of $37.7M.
The change in budgetary authority is summarized below:
|Vote||Explanation of Change (thousands of dollars)||Change ($)|
|1||Funding in support of the ongoing implementation of Defence Priorities||500,000|
|1||Annual escalator on defence spending||353,972|
|1||Funding authorized to be carried forward between fiscal years||190,579|
|1||Funding for projects at Canadian Armed Forces bases and other defence properties (Federal Infrastructure)||111,652|
|1||Canadian Armed Forces Growth||71,833|
|1||An increase in funding to support Federal Contaminated Sites Action Plan||60,974|
|1||Other miscellaneous departmental requirements||(17,084)|
|1||Total Operating Expenditures||1,271,926|
|5||Net adjustments to the spending profile of major capital equipment and infrastructure projects to align financial resources with project acquisition timelines||(726,800)|
|5||Funding authorized to be carried forward between fiscal years||(112,927)|
|5||Funding for projects at Canadian Armed Forces bases and other defence properties (Federal Infrastructure)||108,195|
|5||Other miscellaneous departmental requirements||17,624|
|5||Total Capital Expenditures||(713,908)|
|10||Total Grants and Contributions||(9,440)|
|(S)||Total Statutory Expenditures||37,745|
The change in Vote 1 budgetary authority is primarily due to an increase in funding in support of the ongoing implementation of Defence Priorities, for the annual escalator on defence spending, for funding authorized to be carried forward between fiscal years, for funding related to Federal Infrastructure projects, for Canadian Armed Forces Growth and for funding to support the Federal Contaminated Sites Action Plan.
The change in Vote 5 budgetary authority is primarily due to a decrease in the net adjustments to the spending profile of major capital equipment and infrastructure projects to align financial resources with project acquisition timelines. Specifically, cash requirements for the Family of Land Combat Vehicles, the Medium-Heavy Lift Helicopter project, the Maritime Helicopter project, and the Tank Replacement project are lower in 2015-2016 than in 2014-2015. Additionally, there was a decrease in funding authorized to be carried forward between fiscal years. The decrease in Vote 5 is partially offset by an increase in funding related to Federal Infrastructure projects and other miscellaneous departmental requirements.
The change in Vote 10 budgetary authority is due to a decrease in transfer payments.
The increase in statutory budgetary expenditures is primarily due to higher employer’s portion of the Employee Benefit Plan contributions and a significantly larger carry forward for the receipt of proceeds from the disposal of crown assets as compared to the prior year.
Statement of Departmental Budgetary Expenditures by Standard Object
YTD "net budgetary expenditures" increased by $33.5M (0.4%) compared to last year.
In Q2, “net budgetary expenditures” increased by $83.6M (2.0%) compared to the same quarter last year.
The standard objects with the most significant increases in Q2, as compared to the same quarter last year, were:
- Professional and Special Services ($77.9M) – principally due to increased professional services requirements for several major capital equipment projects;
- Repair and Maintenance ($64.2M) – primarily due to an increase related to real property and equipment as well as deployed operations;
- Acquisition of Machinery and Equipment ($48.5M) – primarily due to increased procurement of spare parts for aircraft, ships, auxiliary vessels and land mobile equipment; and
- Transportation and Communications ($41.7M) – primarily due to increased costs for military relocations and deployed operations.
The standard objects with the most significant decreases in Q2, as compared to the same quarter last year, were:
- Personnel ($183.8M) – primarily due to disability insurance costs paid in Q2 FY 2014-2015; and
- Acquisition of Land, Buildings, and Works ($18.8M) – primarily due to delays in receiving project approvals.
Revenue decreased by $52.6M primarily due to a timing difference in payments received from the United Kingdom related to the provision of service to the British Army units training in Canada and changes in quantities of fuel sold to foreign countries.
3. Risks and Uncertainties:
To fulfill its mission, DND purchases the goods and services necessary to train military forces, conduct operations at the request of the Government of Canada and acquire related infrastructure and equipment both domestically and internationally.
As such, DND’s financial transactions are exposed to a broad range of external financial and economic risks such as inflation, foreign exchange and commodity price fluctuations. Depending on how these risks unfold, they could lead to surpluses or shortages. For example, an appreciation of the Canadian dollar or deterioration of commodity prices, oil in particular, could result in lower spending. Conversely, a depreciation of the Canadian dollar or increase in commodity prices could result in budget pressures.
While DND considers key economic and financial risk factors including defence specific inflation and foreign exchange in developing expenditure strategies, these risks are outside of the control of DND.
Additionally, significant unforecasted operational demands can occur at any time, requiring DND to respond anywhere on the globe. Depending on the extent of the operational demand, the cost of unforecasted operations would be mitigated either through internal reallocations or by requesting incremental funding from Government.
4. Significant Changes in Relation to Operations, Personnel and Programs
In the past few years, DND has faced a changing fiscal environment. In response, the Department has launched a number of initiatives, including Defence Renewal, aimed at improving business processes and practices. The implementation of these initiatives is a priority for 2015-2016. Defence Renewal is focused on re-evaluating requirements, finding efficiencies and generating savings for reinvestment in military capabilities and readiness, including the internal reinvestment of personnel to higher priority tasks. Despite the challenging economic times, DND/CAF will continue to deliver a combat-effective, multi-role military for Canada and Canadians by enhancing operational capabilities and reducing corporate and institutional overhead.
// SIGNED BY //
// SIGNED BY //
C. Rochette, CPA, CMA
Chief Financial Officer
Dated: 27 November 2015
5. Financial Tables
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